Life, death and money

Oil prices and the corona virus

The oil price used to spike upwards at the first sign of global fear. But times have changed. As a commodity, oil remains essential to modern life and economic welfare. However, its production is now more geographically dispersed than ever before. The US is a net exporter of oil. No longer is the middle east, and the Persian Gulf in particular, the most important part of a world that relies on oil for energy.

Not many years ago, the emergence of the Corona virus would most likely have seen a surge in oil prices. Today, we are more likely to see a significant drop. The reason for this is China’s reaction to virus containment. Life is not normal there at present. Economic activity has been reduced, deliberately so, to avoid virus transmission and the results will soon be obvious. The demand for oil in China is falling rapidly.

A falling oil price is likely to be welcomed by the consumer at the petrol pump. It may give countries that hold limited reserve supplies opportunity to increase those reserves. But it will not be good for oil producers as margins are squeezed. China’s economy has been generating so much growth for over 20 years now that many other countries are heavily connected through supply and demand chains. Those trade arrangements are going to be hurt by a recession in China. Where a fall in costs of a production factor such as oil would usually spur demand, in a world of enforced quarantines of Chinese citizens there won’t be any additional demand.

Crude oil prices are down about 15% during January 2020. OPEC, in normal fashion, has announced it will reduce supply, but perhaps the power of OPEC has peaked.